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What is the result if a negotiable instrument is stolen?
A negotiable instrument made out to a specific individual is order paper. If the instrument is stolen, the thief can only transfer it by altering or forging the payee’s signature. As such, a transferee of stolen, forged order paper is not a holder or holder in due course and therefore does not take free of the payor’s defenses. Bearer paper, on the other hand, may be transferred by anyone in possession of the instrument. A thief can negotiate stolen bearer paper to a holder. A holder of the paper would be subject to a payor’s personal defenses or a claim by a payee that the instrument was stolen. In contrast, a holder in due course of stolen bearer paper takes the instrument free of the claims of the payor that it was stolen.
• Note: Special rules apply when the theft of the negotiable instrument is carried about by an agent (such as an employee) of the payor. If an agent misappropriates an instrument, the principal may be liable on the instrument based upon the authority of the agent. The principal has a claim to the instrument or its proceeds against the agent and subsequent takers unless a subsequent transferee is a holder in due course.
• Discussion: How do you feel about the ability of a HDC who receives an instrument from a holder to enforce the instrument? Why does it matter whether the thief is also a forger? Should the interests of the payor be balanced against the interest of the HDC in this situation? Why or why not?
• Practice Question: Eric executes a promissory note payable to “Amanda or order”. Tommy steals the note and endorses Amanda’s name. He then sells the note to Max, who is unaware of the forgery. What is Eric’s obligation to pay the instrument? What rights does Amanda have? What are Max’s rights?